The Scale of Friday’s Market Stress
Friday’s crypto market sell-off represented what Bitwise portfolio manager Jonathan Man described as the most severe liquidation event in the sector’s history. More than $20 billion evaporated from the market as liquidity dried up and forced deleveraging took control. The situation unfolded rapidly, with bitcoin dropping 13% from peak to trough in just one hour. The damage to smaller tokens was even more severe – Man noted that ATOM essentially “fell to virtually zero” on some trading platforms before recovering.
What made this event particularly notable was the estimated $65 billion in open interest that disappeared, effectively resetting market positioning to levels last seen back in July. But the raw numbers only tell part of the story. The real issue, according to Man, was what happened beneath the surface in the market’s plumbing.
How Exchanges Managed the Crisis
When uncertainty spikes like this, liquidity providers typically widen their quotes or step back entirely to manage their inventory and capital. This creates a situation where organic liquidations stop clearing at bankruptcy prices, forcing exchanges to deploy emergency measures.
Man explained that exchanges leaned heavily on their safety valves during the turmoil. Auto-deleveraging mechanisms kicked in at some venues, forcibly closing portions of profitable counter-positions when there wasn’t enough cash on the losing side to pay the winners. This is essentially a last-resort measure to keep the system functioning.
Some platforms had additional safeguards in place. Hyperliquid’s HLP liquidity vault, for instance, had what Man called “an extremely profitable day” by buying assets at deep discounts and selling into price spikes. These mechanisms helped absorb distressed flow that might otherwise have caused even more damage.
Centralized vs. Decentralized Performance
The most dramatic dislocations occurred on centralized exchanges as order books thinned out significantly. This explains why long-tail tokens suffered much harder than bitcoin and ether during the sell-off. When liquidity disappears, smaller assets with less trading volume get hit the hardest.
Interestingly, DeFi liquidations remained relatively muted through the crisis. Man pointed to two main reasons for this. First, major lending protocols like Aave and Morpho tend to accept primarily blue-chip collateral such as BTC and ETH. Second, these platforms had “hardcoded USDe’s price to $1,” which limited cascade risk even though USDe traded around $0.65 on centralized exchanges amid the illiquidity.
This created a strange situation where users who posted USDe as margin on centralized venues found themselves vulnerable to liquidation, while the same asset remained stable within DeFi protocols.
Hidden Risks and Recovery Patterns
Beyond the obvious directional traders who got caught on the wrong side of the move, Man highlighted hidden exposures for market-neutral funds. The real risks on days like Friday, he suggested, are often operational – whether algorithms continue running properly, if exchanges stay online, the accuracy of price marks, and the ability to move margin and execute hedges in a timely manner.
Man checked in with several fund managers during the turmoil, and most reported they were managing fine. However, he noted he wouldn’t be surprised if “some c-tier trading teams got carried out” by the extreme conditions.
The recovery brought some interesting patterns. Prices did bounce back from their extreme lows, and the positioning flush created opportunities for traders who had maintained dry powder. With open interest down sharply, markets actually entered the weekend on what Man described as “firmer footing” than the day before. Sometimes, a good clearing out of excess leverage can set the stage for healthier conditions ahead.
Perhaps the most telling detail was the unusually wide price dispersion across different venues. At times, there were $300-plus spreads between Binance and Hyperliquid on ETH-USD pairs – a clear sign of how fragmented and stressed the market infrastructure became during the peak of the crisis.
